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Friday, 08 July 2016 06:27

UNITED STATES | False Alarm Warranty Allows Insurer to Void Coverage

Innocent Material Misrepresentation Sufficient for Insurer to Rescind

The covenant of good faith and fair dealing requires both the insured and the insurer to deal fairly and in good faith when dealing with the acquisition of insurance. When an insurer

makes the decision to insure or not insure a person against the risk of loss of his or her property the insurer relies on the honesty of the insured when he or she submits an application.

FACTS

In Certain Underwriters at Lloyd’ s London v. Jimenez, — So.3d —-, District Court of Appeal of Florida,Third District, 2016 WL 3265750 (June 15, 2016) those Certain Underwriters at Lloyd’s London (“Lloyd’s”) appealed a final judgment following a non-jury trial, in which the trial court granted declaratory relief to Raul and Ada Jimenez, the appellees/homeowners, and determined that Lloyd’s was not entitled to rescission of the property insurance policy issued to the homeowners.

In 2007 Raul Jimenez, on behalf of himself and his wife, Ada Jimenez, completed and executed an application for homeowner’s insurance policy on their home built in 1985, with assistance from their insurance agent, A & A Insurance Underwriters (“A & A”). A & A submitted the Jimenez’s homeowner’s insurance application to a managing general agent of Lloyd’s. During the application process, A & A asked whether Mr. Jimenez had a smoke, temperature or burglar alarm, and if so, whether these alarms were monitored. Mr. Jimenez said he had a monitored central station alarm on the property. On the application form, Mr. Jimenez designated the central station monitor as a protection device that monitored for smoke, temperature, and burglary. After signing the application, Mr. Jimenez was given a copy and was given a chance to ask questions and make sure his answers were true and correct. The policy was given a discount because of the representation that the Jimenezes had a central station alarm monitoring for smoke, temperature, and burglary.

The policy was renewed three times with the same representation and warranty about the alarm system.

As a condition of the insurance, the Jimenezes were required to maintain in good working order all fire alarms, security systems and physical protection devices identified in their application for insurance. The Protection Device Endorsement provision provided that all alarms/security systems must be fully operational and engaged at all times. Failure to comply with this condition would render the insurance null and void.

The policy was personally underwritten by Efren Serrate, president of the managing general agent of Lloyd’s. Serrate testified at trial that a representation in the application that the property had central station monitored smoke and temperature alarms was material to the risk. He further stated that, if the property actually did not have those systems, the Protection Device Endorsement would preclude insurance coverage. Serrate specified that he would not have accepted the risk and quoted a premium if he had known that the Jimenezes did not have a central station monitored smoke and temperature alarm.

In August 2009, there was a kitchen fire at the Jimenez’s home.

Delta Alarm Systems monitored and maintained the Jimenez’s alarm system. At trial, Jose Quintero, the corporate representative of Delta Alarm Systems, testified that the Jimenezes had a burglar alarm but not a central station monitored smoke or temperature alarm system. Lloyd’s expert testified why the alarm warranty was material.

Lloyd’s tendered the full return of the insurance policy premium to the Jimenezes policies. At trial, the parties agreed that the return of the premiums for each of these policy years had been tendered in full to the Jimenezes. The trial court found in favor of the Jimenezes for declaratory relief as to coverage and for breach of contract and held that Lloyd’s was not entitled to rescission.

ANALYSIS

The interpretation of an insurance contract is a question of law.First, regarding the summary judgment issue, the appellate court agreed with Lloyd’s that the Jimenez’s misrepresentations of the presence of a central monitored alarm system for smoke, temperature and burglary were material as a matter of law to the issuance of Lloyd’s insurance policy. As such, recovery for the Jimenez’s house fire was unwarranted.

Florida Statute section 627.409(1) provides that misrepresentations, omissions, concealment of facts, and incorrect statements on an insurance application will not prevent a recovery under the policy unless they are either: (1) fraudulent; (2) material to the risk being assumed; or (3) the insurer in good faith either would not have issued the policy or would have done so only on different terms had the insurer known the true facts. Lloyd’s relies on (2) and (3) in claiming that the Jimenez’s central monitored system statements in their application prevent recovery under the policy in question.

An insurance company has the right to rely on an applicant’s representation in an application for insurance and is under no duty to inquire further unless it has actual or constructive knowledge that such representations are incorrect or untrue. Under Florida law, an insurer has the right to unilaterally rescind an insurance policy on the basis of misrepresentation in the application for insurance. The misrepresentation need not be fraudulently or knowingly made but need only affect the insurer’s risk or be a fact which, if known, would have caused the insurer not to issue the policy or not to issue it in so large an amount.

Lloyd’s has presented sufficient evidence to show that the misrepresentation regarding the presence of a central monitored system was material to issuance of a policy and that, had Lloyd’s known of such lack of protection, it would not have issued its policy. As discussed previously, the broker explained that the existence of protection device systems was material. The testimony provided by Delta Alarm Systems’ corporate representative, Jose Quintero, indicated that no agent for Lloyd’s had been notified of the lack of a central monitored system on the property until after the fire incident occurred.

The misrepresentation made by the Jimenezes regarding the presence of a central monitored system on the property in the insurance application precludes coverage because the misrepresentation was material and was detrimentally relied upon by Lloyd’s. Secondly, Lloyd’s alternatively contends on appeal that, because the lack of a central monitored system was material to the issuance of the policy and was relied upon, the trial court erred in denying Lloyd’s entitlement to rescind the policy. The appellate court agreed.

If an insured’s misrepresentation was material to the insurer’s acceptance of the risk or, if the insurer in good faith would not have issued the policy under the same terms and premium, then rescission of the policy by the insurer is proper. Misrepresentations in or omissions from an insurance application may fail to meet the knowledge and belief standard (that the information given was correctly recorded, complete, and true to the best of the insured’s knowledge and belief) and entitle the insurer to rescind the policy without the misrepresentation or omission being intentional. Even an insured’s failure to read a policy application in its entirety prior to signing it does not preclude an insurer’s right to rescind the policy for nondisclosure of material information.

Because the appellate court found there was a material misrepresentation sufficient to allow rescission, the case was remanded to the trial court with instructions to enter Final Judgment in Lloyd’s favor because the policy does not provide coverage for the Jimenez’s kitchen fire under the language of the Protection Device Endorsement, and because Lloyd’s is entitled to rescission of the policy due to material misrepresentations in the application.

ZALMA OPINION

It is not only a violation of the covenant of good faith and fair dealing to lie on an insurance application, in some states it is criminal to lie on an application. Rescission is an equitable remedy where the court determines, because Lloyd’s, in this case, was deceived, it did not matter that the insured intended or did not intend to deceive it, the policy was void from its inception and never existed.

Article Kindly Sponsored by Zalma Insurance Consultants

ZALMA INS CONSULT

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